Good afternoon, and welcome to the SunPower Corporation's Third Quarter 2012 Results Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to your host, Mr. Bob Okunski, Senior Director of Investor Relations at SunPower Corporation. Sir, you may begin.

Robert Okunski

Thank you, Ed. I would like to welcome everyone to our third quarter 2012 earnings conference call.

On the call today, we will start off with an operating view from Tom Werner, our CEO, followed by Chuck Boynton, our CFO, who will review our third quarter of 2012 financial results. Tom will then discuss our guidance for the balance of the year before opening up the call for questions. As a reminder, a replay of this call will be available later today on the Investor Relations page of our website.

During today's call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in our 2011 10-K, quarterly reports on Form 10-Q, as well as on today's press release. Please see those documents for additional information regarding those factors that may impact these forward-looking statements.

To enhance this call, we have also posted a set of PowerPoint slides, which we will reference during this call on the Events and Presentations page of our Investor Relations website. In the same location, we have posted a supplemental data sheet detailing some of our historical metrics.

On Slide 2 of our PowerPoint presentation, you will find our Safe Harbor statement. Our prepared remarks will run approximately 25 minutes and then we will have a brief question-and-answer session. With that, I'd like to turn the call over to Tom Werner, CEO of SunPower, who will begin on Slide 3. Tom?

Thomas H. Werner

Thanks, Bob and thank you for joining us today. On today's call, we will update you on our Q3 operational highlights and strategic position, review our third quarter financials and provide our outlook for the balance of the year. Overall, Q3 was a strong quarter. Against the backdrop of highly challenging industry conditions, we increased revenue in a number of key markets. SunPower's ability to add value both upstream and downstream enabled us to record our third sequential quarter of midteens gross margins and posted another non-GAAP profit for the quarter.

We also strengthened our balance sheet reducing inventory by more than $40 million and exiting Q3 with more than $375 million in cash.

Now let me provide some specific Q3 operational highlights.

Please turn to Slide 4.

SunPower's North American power plant business continues to perform very well, bragging strong revenue and margin contribution while providing long-term predictability and visibility. Execution on our 250-megawatt CVSR project for energy remains on track and we achieved an important milestone in September by connecting 22 megawatts to the grid.

We remain confident that we will add financing in place to meet our 2013 construction schedule.

These 2 projects provide us long-term financial visibility as both CVSR and ABS together will provide approximately 1/3 of our revenue each year for the next 3 years.

We also continued to build our pipeline of new power plant projects and recently executed a PPA and PG&E for the 100-megawatt Henrietta project in California. SunPower continues to win in the utility scale market as we bring a unique combination of quality in the field, technology and balance sheet for the PV power plant business.

In the North American Commercial business, we recently dedicated approximately 4 megawatts of systems for the Porterville school district in California, bringing our total megawatts installed in the Educational sector to more than 30.

In the North American Residential market, we were once again by far, the largest lease provider. For instance, in California SunPower Leases accounted for approximately 40% of all Residential PV lease applications in Q3.

According to the information from CSI. Over the past year, we have added approximately 13,000 lease customers bringing our total U.S. customer base to 60,000.

This growth has been driven by a combination of attractive customer economics and superior technology, both delivered through the industry's largest and most experienced independent dealer network.

Moving on to Europe, Middle East and Africa. European market continues to be challenging. And our performance was impacted by lower volumes in most key markets as well as declining ASPs.

Our goal is to regain profitability in this region and we are implementing a number of strategic initiatives that will enable us to achieve this goal next year.

I want to reiterate that we remain committed to the European market as a long-term fundamentals for solar are strong there. For example, in France, we are recently awarded 12 projects totaling 33 megawatts. We expect Germany, Italy and France to remain our core markets in Europe.

In the Middle East and Africa, we are continuing to add resources. Our efforts are primarily focused on C7 projects that are well-suited for these geographies.

Additionally, we are also starting to monetize our project pipeline in Israel.

In South Africa, we've been notified by the government that financing for 2 ground-mount projects totaling 30 megawatts will be completed in the fourth quarter.

Moving onto Asia-Pacific. As we mentioned last quarter, SunPower is very well-positioned in Japan by virtue of our superior rooftop product value proposition, our distribution partnership with Toshiba. In Q3 our shipment volume into Japan increased 30% sequentially and accounted for more than 10% of our total revenue. In China and India, we are in discussions to leverage our C7 technology, expect to close at least 1 of these opportunities during the next few quarters.

We also made significant progress in expanding our footprint in Australia as evidenced by our recent strategic investment in time and energy privately owned, local, renewable electricity provider.

Now let's move to technology. Please turn to Slide 5.

SunPower's success stems from our unique technology position. We continue to invest in research and development to extend our competitive advantage. We are ramping production in our next-generation Gen 3 technology, with cell efficiency of up to 24%, highest in the industry.

Tool installation is occurring as we speak and we expect to produce close to 100 megawatts of Gen 3 cells next year.

We would utilize our Gen 3 cells and SunPower's 21% to 22% efficient panels, as well as in our C7 concentrator product where cell efficiency is critically important.

We believe that our customers will be very impressed, not only the higher efficiency of Gen 3 products, but also by their exceptional energy delivery. We recently installed a 1.5-megawatt Gen 3 oasis power block at our 25-megawatt MID project.

The side-by-side performance coming from this site confirms that the Gen 3 power block is delivering significantly higher energy in our Gen 2 technology. This is particularly notable considering the Gen 2 technology is already the industry gold standard in terms of energy delivery.

The final area of technology is our step reduction program. Manufacturing team has executed well as all of our lines at Fab 2, have now been retrofitted to run the new process.

The rollout of this program, which reduces our line process steps by 15% was accomplished a full quarter ahead of schedule, with yields and equipment efficiency above plan.

We will start converting Fab 3 over to the new process next year.

Now let me turn toward the topic of costs.

You may have noticed that during Q3, we announced the industry's first 25 year comprehensive product and performance warranty. SunPower's ability to offer a full 25-year warranty, 15 to 20 years longer than our competitors, is directly related to our superior cell and panel technology. It is extremely resistant to cracking, corrosion and result output degradation.

As we've mentioned on our last earnings call, we have been thoroughly reviewing over 3 million panel years of field operating data and corroborate this remarkable, long-term panel reliability characteristics that we first identified in our reliability labs. The importance of this new performance warranty is that it provides our customers with another source of tangible, measurable life cycle value.

This is the panel ASP, our customer's pay on a total systems basis. Moving 1 step to the right, we see the efficiency benefit our customers capture due to reduced balancing system and installation costs. This benefit varies for different segments and can easily range between $0.20 and $0.30 per watt for a typical Residential or light Commercial system.

Moving another step to the right, we see the benefit of increased daily energy production. On average, SunPower panels deliver about 7% more energy than conventional silicon technology. This benefit leverages the entire installed system costs.

This example uses $4.50 per watt as the total system cost and the energy benefit is a little over $0.25 per watt.

Finally, the next step to the right-hand side of the chart shows the value of the lower degradation, which is the result of our unique copper-based back-contact architecture, where a 25-year system life has reduced degradation will account for around 6% higher total delivered energy. On a discounted basis, this is worth another $0.15 per watt, for the case in question and backed by our improved panel warranty. This example shows clearly why our customers are willing to pay a significant premium for SunPower panels compared to conventional panels on a total system basis. In this case, a total between of between $0.60 and $0.70 per watt. Put it in another way, our customers pay a premium on a watt peak basis. The advantages I just mentioned lead to our customers actually paying less for energy over the life of the system.

As we speak about our recent business later in the call, keep in mind that SunPower fully monetizes these energy and reliability benefits by virtue of the lease structure.

Now let me briefly cover some specifics on costs.

For the quarter, we met our blended cost per watt targets and remain confident in our cost down road map calls for us to exit 2012 with a minimum 25% year-on-year cost reduction.

We will accomplish this through higher yields, improved overall equipment effectiveness and lower raw material cost. For example, our Q3 silicon utilization is 4.8 grams per watt. First time we have achieved poly utilization below 5 grams per watt on a quarterly basis.

Finally, as we announced, we're further restructuring our manufacturing operations in the Philippines to reduce cost and improve operational efficiency. This will result in a temporary idling of 6 of our 12 lines in Fab 2, reduce Q4 utilization to approximately 60%. We took the painful step of reducing our headcount by 900 employees as a result of this restructuring, a significant majority of this reductions in the Philippines.

Through this reorganization, we believe we will reduce inventory, improve efficiency, and further improve our competitive position during the industry's transition to a long-term, sustainable market.

The quarter cash and cash equivalents increased to $377 million. On the working capital side, we successfully reduced inventory by approximately 10% while meeting all of our project milestones.

With the manufacturing and restructuring in the Philippines, we expect further inventory reductions as we go through 2013. We are also focused on managing our operating expenses given current industry conditions and are allocating our CapEx dollars to those projects offering the greatest returns.

With that, I'd like to turn the call over to Chuck for a more detailed review of our financial performance. Chuck?

Charles D. Boynton

Thanks, Tom. Good afternoon and please turn to Slide 8.

Today, I will discuss 2 key themes: first, I will talk about our operational performance for the quarter and then provide some color on what is driving the success of our leasing business.

As Tom mentioned, our financial performance in the quarter was solid as we leveraged our diversified downstream model and cost reduction strategies to achieve better than forecasted results. Our non-GAAP revenue for Q3 was $607 million compared to $651 million in Q2 2012. We saw outperformance in North America and Japanese markets, but the strength was more than offset by the continued weakness in Europe.

Non-GAAP revenue in the third quarter includes approximately $231 million from a continued construction of CVSR and $11 million from our 25-megawatt McHenry solar farm for the Modesto Irrigation District. The difference between GAAP and non-GAAP revenue is with a GAAP based real estate accounting requirements, whereas non-GAAP revenue follows the IFRS convention for revenue recognition. For the third quarter, GAAP revenue exceeded non-GAAP revenue by approximately $42 million.

Global ASP decline in the quarter were in line with our expectations at less than 10% and we maintained our meaningful pricing premium across all geographies. Cell production in Q3 was 227 megawatts, down approximately 10% versus Q2 '12 as we manage our manufacturing output to match current industry conditions and focused on reducing inventory levels. Megawatts recognized for the quarter totaled 210 megawatts, also down 10% sequentially as we were impacted by further weakness in our European rooftop business, primarily Germany and Italy.

Due to our flexible downstream model, we were able to reallocate a number of megawatts to stronger markets, which is the U.S. and Japan, which had not offset the current weak conditions in this region.

As we mentioned in prior calls, we are focused on our cost-reduction initiatives and have a 3-point plan covering our full products, which includes BOS, operating expenses and Capital expenditures. Our efforts are starting to bear fruit and show in our results this quarter.

Our non-GAAP global gross margin for the quarter was 14.1% and above our plan. Our strong gross margin performance for the quarter was attributable to the continued execution in our North American project business, as well as further share gains in the Japanese market.

Now let me spend some time on our regional performance.

In Q3, non-GAAP North America revenue was up slightly to $460 million sequentially, accounting for 76% of total revenue for a non-GAAP gross margin of 20.2%. Our CVSR project remains on plan and U.S. Residential, our leasing product, continues to see strong demand. We remain the leader in Residential in California in both cash and lease sales.

In EMEA, non-GAAP revenue was $89 million, down significantly from last quarter as overall volumes declined due to reduced demand and ASP pressure. Our 2 largest markets in Europe, Germany and Italy, declined to 6% of total revenue versus 11% last quarter. Non-GAAP gross margin in Europe was a negative 23%. This margin includes inventory and production charges of $21 million.

Without those charges, margins for the quarter would've been slightly positive.

We are committed to the EU market and firmly believe that our technology advantages offer us a strong economic value proposition in Germany, Italy and France.

In APAC, revenue was $58 million, up 20% sequentially as we continue to see strong demand dynamics in Japan with a new subsidy adoption. We are well-positioned to continue our growth in this market through our extended relationship with Toshiba as our high-efficiency technology is perfectly suited for the Japanese rooftop market. Non-GAAP gross margin for the quarter in APAC was 21.4%.

Non-GAAP operating expenses for the third quarter was $75 million, this was an increase from Q2 primarily driven by an $8 million bad debt reversal in the second quarter. We ended the quarter with a non-GAAP loss before tax of $1 million and recorded a non-GAAP tax benefit of $3.9 million.

Overall, our non-GAAP earnings per share for the quarter of $0.03 is better than planned. On a GAAP basis loss per share was $0.41, though GAAP loss per share includes approximately $60 million and one-time charges related to goodwill and intangibles.

Excluding these charges, GAAP loss per share was also better than our plan. Our non-GAAP weighted average diluted shares outstanding were $119.2 million. As Tom already discussed, we prudently manage our balance sheet and working capital during the quarter as we increased our cash position and reduced inventory levels by more than $40 million sequentially. Our cash conversion cycle remains low at 43 days.

Please turn to Slide 9. Per context, North American Residential is slightly more than 10% of our revenue and leasing is a subset of that business. We are providing this additional information in this call as it is relatively new to our investors and it's fairly complex.

As you know, SunPower has been serving the Residential market segment since 2005, and remains the U.S. Residential market leader with more than 330 megawatts installed to date.

With approximately 60,000 U.S. customers served by 500 authorized dealers across 45 states, and a more than 30% market share in California, we have the largest and most established market footprint in the industry executing on our long-term strategy of end market diversification, we have a low-cost, flexible delivery model that enables us to rapidly roll out new products and services to our dealer partners and end customers. Additionally, the combination of our upstream manufacturing and standardized racking, inverters and monitoring, provides a closed loop innovation cycle that provides our Residential customers the best in class solar solution that's competitive with current electricity rates.

This strong U.S. Residential infrastructure is why we're the leader in U.S. Residential leasing.

Let me touch on what we see our 4 key attributes for success in the Residential leasing business and why SunPower has a distinct competitive advantage in this segment. They are: system performance and reliability, scale, access to capital and brand.

System performance and reliability is a key factor in a solar lease. Leasing is really an LCOE, or cents per kilowatt hour-based decision, put another way, the consumer is not leasing a solar system, but buying energy over a period of time for a set price. Therefore, reliability and degradation rates directly impact the customers' economics. We offer the industry's highest efficiency, solar systems back for the longest and most comprehensive warranty.

Second, to be successful in the Residential leasing business, you need scale. Scale drives operating efficiencies the capability to rapidly adjust the changing market conditions and the ability to spread costs across a larger footprint. As I mentioned earlier, we have the largest solar footprint in the U.S. and that scale provides a leverage to go from launch of leasing to number 1 market share in the course of one year.

Third, financing and access to capital are also key components in Residential lease. They have a direct impact on margins. A strong balance sheet, established technology and bankability, all play a key role in financing as these attributes reduce risks to financiers. A lower financial risk level translates to a lower cost of capital and higher margin to SunPower. We're starting to see larger pools of capital being allocated in the leasing business and expect to secure additional financing capacity in the coming quarters to support our growth.

We also expect some of the early entrants in the solar leasing market to start securitizing their Residential assets over the next few quarters. Remember, in Q4 2010, we were the first company to securitize solar projects. We expect to securitize solar leases and our pool is large enough to support this capability in mid to late next year.

Finally brand. As you know, our success in the Residential business is based in our ability to offer a superior customer experience compared to our competitors and a company that is at heart a technology company. This advantage is easily seen in the pricing premium we receive for our systems on both cash and lease.

We work very closely with our dealers to instill best practices and with lease, give a more direct engagement opportunity to drive SunPower loyalty, launch future products and activate referrals.

Before I turn the call back over to Tom for guidance, we have also posted a slide on a number of important metrics related to our Residential business particularly, our leasing business on Slide 11.

As many of you will use this data to model our leasing business going forward, I'd like to provide some additional details that we hope you will find useful.

This information provided is solely related to our Residential cash and Residential leasing business, excluding the impact from our Commercial business in this data set. As you can see, we booked both Operating and Capital leases. Over time, this mix will change slightly. Residential lease customers include all customers who have signed the lease are in the process of getting a system installed or already have a system connected. Each installation is counted as a unique system from a customer count perspective, including lease, our total U.S. customer base is 60,000 customers with more than 100,000 globally.

Leasing remains a small part of our overall business at present, but with 100 megawatts book to date, is growing rapidly and will account for approximately 10% of our mega watt shift this year.

In summary, our strong Q3 performance reflects the execution of our strategic approach to the market and ability to leverage our technology advantage. We are focused on our cost control programs and prudent balance sheet management. With the support from Total, we are confident in our ability to drive profitable, long-term growth at SunPower. With that, I'll turn the call back to Tom.

Thomas H. Werner

Thanks, Chuck. I would now like to turn to our guidance for the fourth quarter in fiscal year 2012.

For Q4 2012, we expect to recognize approximately 200 to 250 megawatts in revenue, which reflects the temporary idling of 6 lines in the Philippines for the quarter. We see non-GAAP Q4 revenues in the range of $700 million to $900 million, with non-GAAP gross margins projected to be in the range of 14% to 16%. On a GAAP basis, we expect revenue of $650 million to $850 million and a gross margin of 2% to 4%.

Non-GAAP earnings per share is projected to be in the range of $0 to $0.25, with GAAP loss per share of $0.75 to $1. Large revenue and EPS ranges for the quarter -- fourth quarter reflects the impact of a number of large-scale projects that may close in the quarter.

Capital expenditures in the fourth quarter is expected to be in the range of $30 million to $40 million. For the fiscal year 2012, we expect non-GAAP total revenue of $2.6 billion to $2.8 billion. Volume recognized to be in the range of 840 megawatts and 890 megawatts, again, reflecting the restructuring in our Philippines operations. The capital expenditures of $115 million to $125 million. In summary, SunPower is delivering positive financial results despite the challenging industry conditions. We are well-positioned to benefit from our long-term strategy of technology leadership, demonstrated downstream value add, solid balance sheet management and continued support from Total. We'll now open the call to questions. In addition to Chuck, we also have Howard Wenger, President of Regent and Bob Okunski, our Senior Director of Investor Relations.

Question-and-Answer Session

Operator

[Operator Instructions] Our first one comes from Satya Kumar.

Brandon Heiken - Crédit Suisse AG, Research Division

Hi, this is Brandon Heikin with Credit Suisse. I was speaking on behalf of Satya Kumar. I was wondering if you could talk about the economics of the Residential leases. I really thank you for sharing the megawatt info there, but I was wondering if you could talk about sort of the value created for SunPower and your own plans to own versus monetize those Residential leases?

Thomas H. Werner

The economics for SunPower are compelling on lease. As we've mentioned in last quarter's call, our actual gross margin percent is lower than average. But secondly, the margin per watt is higher. Capital leases, as we mentioned, are booked upfront and operating leases are over time, but the cash flows are relatively similar for both.

Operator

Next question comes from Kris Kovaks.[ph]

Unknown Analyst

Can we maybe go into a bit more detail, obviously, margins in Europe are kind of a tough spot. And now you're doing a lot of efficiency improvements across the company as a whole and particularly in the Philippines and such with the a capacity rationalization. But what are some of the more specific things that are particular to Europe unless you get back to a breakeven or above gross margin there?

Thomas H. Werner

This is Tom. In Europe I -- as you've noticed, volumes have decreased and what we're -- the actions we're taking to improve things are to focus on 3 specific countries: Germany, Italy and France, as our core countries. And in those countries, we are customizing our offering to those particular markets. We're being more aggressive on price we were in the first half year, which we can afford to do because our costs are coming down faster. And as the policies change in those 3 markets, there is unique to each of these markets, we can customize the offering and work more closely, which is predominantly through our dealer channel in those 3 markets. So I'd say, in Europe proper, focus, more aggressive pricing in customizing our offering to those markets.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Okay, and can I ask 1 quick follow-up? I just wanted any commentary on performance of the C7 deployments you already have in the field?

Thomas H. Werner

We've built a couple on demo systems and we're now just now deploying our first production system. I've actually built 3 demo systems so far and a demo system is about 100 kilowatts and then we're building our first megawatt, soon to build 6 more megawatts in Arizona. And all of the systems are meeting or beating expectations. And as we scale up for the 6 megawatts, that we're building during first half of next year, our cost targets are being met as well. So our view on C7 is a really, really strong, competitive weapon has improved given the experience that we've had in the last 6 months.

Operator

Next question comes from a Ahmar Zaman.

Ahmar M. Zaman - Piper Jaffray Companies, Research Division

Piper Jaffray, Tom, and team, great execution in the quarter. Question around the U.S. market and also Europe, given the challenges you're facing in the European market. I wanted -- I want to hear from you given, all these sort of anti-dumping tariff discussions and investigations going on in these markets, how is this affecting your business? Are you taking more share because of this in the European market or potentially see yourself taking more share, or benefiting in some way from this? How should we think about it?

Charles D. Boynton

Yes. Okay, so let me just say a few words about tariffs in the markets and then Howard, maybe you can expand a little bit on your views on Europe and just where we expect to be strong. What I would say to you is the impact of tariffs in the U.S. has been what I would consider to be fairly minimal. We're at least not noticeable in terms of pricing. The European situation, I think that there's clearly a movement to -- made in Europe or positioning to be able to produce in Europe. Fortunately, we're consistent really well, having significant production already in Europe. So we think we're future-proofed in terms of where Europe is going, in terms of tariffs and we see competitors moving relatively quickly to establish production in Europe as well. Should be a little hard to predict, but I am not -- we're certainly not counting on feed-in tariffs as significant advantage.

Just a couple more commentary on America and then Howard, maybe you can say a few words.

The American market, is a relatively complex and it varies by channel. It's different for Residential, Commercial and Utility. Since this is our home market, this is where we're most deeply penetrated in the downstream and as we've mentioned in our remarks, we're #1 in residential leasing, we're usually in the top 1 or 2 in Commercial, which is a PPA-driven business. And then we're a self-developer in the UPP business. So I think that those -- the downstream integration is really the factor that makes the big difference in terms of our competitive position. Howard, do you want to say a few words about Europe?

Howard J. Wenger

Sure, Tom. So as Tom mentioned, we're in a very good position to rationalize and grow our European business. A, because it shifted from ground systems to roof systems predominantly. So it's become, a predominately distributed generation market, and as you know our product plays extremely well on -- for rooftops. And then one of the things that we've demonstrated that we can do well is leverage our dealer channel, and we've shown that in the United States. We have a very robust dealer network in Europe, with about 4x the number of dealers that we have in the U.S. And -- but 1 thing that we're not doing in Europe right at the moment is delivering a solution to the end customer like we're doing in the U.S., with the leasing product. So you can anticipate that we're going to be looking at financial products and delivering more of a solution to the end customer through our dealer network there that we can leverage. And that of course, will improve the economics to the company and to the end customer.

So that's a big focus for us in Europe.

Ahmar M. Zaman - Piper Jaffray Companies, Research Division

And if I may have a follow-up on the Australian market, can you give us an update on your exposure and what you're seeing in the Australian market? It seems to be growing pretty rapidly.

Charles D. Boynton

Thanks for the question about Australia because we made an investment in Australia in Diamond energy, which is a Gen Taylor and this is a move in Australia that as you know is a competitive retail market. And this is considered the next step in terms of downstream integration. And it allows us to offer our customers, essentially, on financing on -- and it allows us to sell energy directly to the customer much like lease does in America. So as we've said over and over, our customers buy energy very much overtly now. In the case of Australia though, we're now -- what is known as a Gen Taylor. And so whole level of investment isn't necessarily material, the strategy is material, and we think upside potential in Australia is rather significant, and the concepts that we developed in Europe, we think we can develop elsewhere. So competitive retail market on that is growing well, but it has a structure unique and not common in other parts of the world.

Operator

Next question will come from James Medvedeff.

James Medvedeff

Cowan and Company. A couple here. Can you discuss your expense targets? You mentioned on the call that's one of the strategic drives and could you give a little more color to what that might look like next year?

Thomas H. Werner

Sure, I'll comment briefly and give it to Chuck. As Chuck mentioned, we're focused on reduction of marginal cost, down to systems cost and operating and capital expenditures. So all 3 of those, we have targets for '12 and '13. Your question is specifically on the operating expense side.

Charles D. Boynton

Yes. Operating expenses, we think will decline 5% over the next few quarters and we'd expect longer-term remodel at approximately 10% of total revenues.

James Medvedeff

Okay, what about -- on the last call, you gave a $0.70 to $0.72 cost per watt, for I guess, what would have been second half of 2012. What sort of trajectory do you see for that into next year?

Thomas H. Werner

The number you were referring to is efficiency adjusted and we have not guided, and appreciate your using that number because that's the competitive number. We have not guided a new number, but I'll tell you that we think it's that number or heading further south. So we'll comment on that further on the next call. But I think that number is the high end of where we think we're going to be next year.

James Medvedeff

Okay, and 1 more if I could. The gross margin it looks like it holds up pretty well in Q4, maybe even expands a little from Q3 despite the 6 shutdown blinds or idle blinds. Is that happening early in the quarter or late in the quarter, or does the gross margin guidance exclude any sort of underutilization charge?

Thomas H. Werner

Yes, we include the inventory and line utilization in our numbers. So we have traditional and we continue to do so. I think that separates us from quite a few of the others probably. So the answer to your question, 6 line is -- up to 6 lines we'll be out of production for all of Q4, and that absorption of that overhead or that under absorption is built into the numbers that we've guided to.

Operator

Next question comes from Aditia Sakahari[ph].

Unknown Analyst

Two questions, please. First of all In Japan, Tom, could you talk a little bit more about Europe, more about the competitive landscape in Japan and how should we think about the Japanese business over the sort of next couple of quarters?

Thomas H. Werner

All right. Howard, I'll say a few things and if you'd like to jump in just do so after I'm done.

So I -- the Japanese market is largely a Residential market after Fukushima, there is the development of a ground out market there that we don't think will be a long-term part of the business. It might be, but we're not counting on it. But we think it's largely a rooftop business.

The market has accelerated rather dramatically with the introduction of their feed-in turf and competition is fierce, but it's a market that really values high technology and high-quality. And of course, states-constraint, so it's ideally suited for us. Our partnership with Toshiba is working great because it's a combination of 2 quality brands that are positioned very well in the market. So rooftop accelerated rapidly because of the feed-in turf structure and really, really well-suited to the strength of our company. Howard, do you want to add anything?

Howard J. Wenger

Just a couple of words, Tom. The partnerships are really important in Japan with well-known brands. The consumers are extremely brand conscious. And so we think that we started over 6 years ago in developing relationships in Japan. And the one we have with Toshiba is very well-known. The access to the market is extremely diffuse, meaning there are many points of delivery through a lot of installers and dealers, very small ones. And so, there is a very structured distribution chain there in Japan that maps back to these well-known bands. And so we think we have a very unique product in the marketplace, extremely differentiated that's highly valued by the consumers in Japan for its efficiency, it's look, it's reliability, it's quality. Those are the things that resonate. So we're very pleased on how things are going so far.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Great. My second question was on the U.S. market. Could you give us an update on these -- the landscape of the financing market in the U.S. for large-scale projects and then should we expect to see better sort of terms and conditions as you look to close financing on the Antelope Valley project?

Thomas H. Werner

Unfortunately, you're breaking up a little. So I think I got it, and I'll answer it and feel free to clarify your question if I don't get it 100%.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Sure.

Thomas H. Werner

Financing market for large-scale systems varies considerably by the quality of the project, it's maturing I would say, it's a project that's perfected or close to perfected like Antelope Valley is in hot demand. And then you can have projects that only have land position. And then the quality of that land position can vary considerably in which case, I think there are still a lot of interest, but far less competitive. And the scale of Antelope Valley, I think is unique. I think, as we look forward, we'll see less of those very large scale projects and we're going to see more projects like Henrietta, which fits much better into the financing environment. And in large it's a number of investors who can own the project themselves. So I'd say -- the other factor that I want to mention is that the maturity of solar technology at a large-scale is improving dramatically because of projects we're building and there's another solar company that's building some large-scale projects as well. So the investors are getting experience with large-scale projects in a great deal of comfort with the speed and execution of those projects. So very competitive and increasingly so would be my summary.

Thank you, all, for joining us today. We had a strong quarter. Our strategies of having a diverse go-to market vertically integrated go-to market approach with differentiating technology, both moduled and balanced system while lowering cost, very aggressively, the strength of our balance sheet including Total, positioned us excellently in Q3 and for the future. We really appreciate your time. Thank you.

Operator

At this time, that will conclude today's conference. You may disconnect, and thank you for your attendance.

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